Globalisation and Inflation: New Cross-Country Evidence on the Global Determinants of Domestic Inflation

54 Pages Posted: 25 Sep 2007

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: May 2007

Abstract

There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation for this phenomenon is that monetary policy has been much more effective. There is no doubt in our mind that this explanation goes a long way towards explaining the better inflation performance we have observed. In this paper, however, we begin to explore a complementary, rather than alternative, explanation. We argue that prevailing models of inflation are too country-centric, in the sense that they fail to take sufficient account of the role of global factors in influencing the inflation process. The relevance of a more globe-centric approach is likely to have increased as the process of integration of the world economy has gathered momentum, a process commonly referred to as globalisation. In a large cross-section of countries, we find some rather striking prima facie evidence that this has indeed been the case. In particular, proxies for global economic slack add considerable explanatory power to traditional benchmark inflation rate equations, even allowing for the influence of traditional indicators of external influences on domestic inflation, such as import and oil prices. Moreover, the role of such global factors has been growing over time, especially since the 1990s. And in a number of cases, global factors appear to have supplanted the role of domestic measures of economic slack.

Keywords: globalisation, Phillips curve, inflation, monetary policy

JEL Classification: E31, E52, E58, F02, F41

Suggested Citation

Borio, Claudio E.V. and Filardo, Andrew J., Globalisation and Inflation: New Cross-Country Evidence on the Global Determinants of Domestic Inflation (May 2007). BIS Working Paper No. 227. Available at SSRN: https://ssrn.com/abstract=1013577 or http://dx.doi.org/10.2139/ssrn.1013577

Claudio E.V. Borio (Contact Author)

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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